Bob’s Journal for 5/4/23

Latest I-Bonds Still Are a Good Deal for Savers

Yields are lower than their 2022 peak, but Inflation-Linked Series I U.S. Savings Bonds (I-Bonds) still are a good deal for savers.

I-bonds pay two interest rates. One rate is fixed for the life of the bond. The other rate is adjusted every six months in line with the latest inflation data. A buyer must hold the bond for at least five years to receive all the interest. There’s a penalty when an I-bond is redeemed after less than five years.

Savers scrambled to buy I-bonds in 2022 when the total six-month guaranteed rate soared to 9.62%.

The latest guaranteed six-month rate on I-bonds is 4.30%. That rate is good for bonds purchased through Nov. 30.

But the fixed-rate, or base rate, for the latest I-bonds is 0.90%. Previously, the fixed rate was 0.40%.

The 0.90% base rate is guaranteed for the life of the bond. You receive the inflation adjustment on top of the fixed rate. That higher fixed rate makes today’s I-bonds more attractive over their life than those purchased in 2022 with higher initial yields but lower base rates.

I-bonds should be purchased online through the U.S. Treasury’s TreasuryDirect.gov website. When purchased online, an individual can own up to $10,000 of I-bonds. The limit is $5,000 when a paper application is used.

The $10,000 limit can be increased by purchasing I-bonds under different names, such as an individual name and a trust name. Details of how to increase the purchase limit are on the Treasury Direct website and can be found elsewhere online.

Be aware that the Treasury Direct website is considered dated and clunky by many users. It also tends to experience problems when it has significant traffic. The site went down at the end of April when the Treasury posted the new interest rate that took effect May 1.

What To Do About the Debt Ceiling Brinksmanship

The United States is in another of its periodic crises over the extension of the federal debt limit. Investors should consider how they want to prepare.

The latest estimate is that the United States will reach the debt limit around June 1. At that point, the government must stop spending more than it receives in taxes and other receipts until the debt limit is increased.

We’ve had debt-ceiling conflicts about 15 times since 1995. The most dangerous one was in 2011 when a deal wasn’t made until after the deadline.

It is important to know that the government won’t completely shut down and have to stop spending any money. The government only has to stop spending more than its revenue.

Tax receipts and other revenue will continue to flow into the treasury, and that money can be spent.

The executive branch decides which spending to prioritize and which to defer. Typically, the government tries to make benefit payments, such as for Social Security, Medicare, and Medicaid, and defer many other payments. But sometimes the executive branch wants to maximize pain to motivate Congress to make a deal, so it reverses the priorities.

When the debt limit is reached, new treasury bonds won’t be issued. It’s possible some interest and principal due on existing treasury bonds won’t be paid.

Because less money will flow through the economy, there would likely be a reduction in economic activity and growth. That should cause a drop in prices for stocks and other assets.

Counterintuitively, there’s typically a flight to safety as the debt ceiling deadline approaches. More people buy treasury bonds and increase their prices, though there’s a risk that interest and principal on the bonds won’t be paid for a while.

Historically, Congress and the President agree on a deal either just before or shortly after the debt ceiling is breached. They agree that all suspended payments will be made up. The economic and market effects are reversed in short order.

But if it takes longer to make a deal and restore the cash flow, there could be damage to the economy and markets that is difficult to reverse.

Investors in treasury bonds and debt should be prepared for a suspension of interest and principal payments. Other investors need to be prepared for market disruptions and volatility.

This is an additional reason I see more risk in the markets and economy than is reflected in current investment prices. It is why I recommend balanced, diversified portfolios. You want assets with margins of safety. You also should have part of your portfolio invested with flexible managers who can sell short investments as a tactical move.

More Reasons Medicaid Shouldn’t Be Your Long-Term Care Plan

Some years back, I was making a presentation to a large group about retirement planning.

After the meeting, an audience member came up to me and questioned my statement that long-term care facilities could turn away applicants who didn’t have sufficient financial resources or evict residents who didn’t pay their bills. He was a retired government worker who was involved in health care policy and didn’t believe such actions were allowed.

A few days later, he sent me an email saying he’d be in contact with a former colleague who confirmed what I said. He even provided a list of citations to articles and laws.

The situation hasn’t changed.

A recent article pointed out that federal law protects Medicaid beneficiaries who resident in nursing homes. But it doesn’t protect non-Medicaid recipients. It also doesn’t protect Medicaid beneficiaries in other facilities, such as assisted living residences.

I’ve also pointed out that Medicaid only pays for nursing home care or limited home care, not for assisted living or other care, and it is difficult to qualify for Medicaid nursing home benefits.

Also, Medicaid’s reimbursements to nursing homes are much lower than the amounts charged to non-Medicaid beneficiaries. The result is that long-term care facilities that have primarily Medicaid beneficiaries tend to provide less care than others.

It is best not to rely on Medicaid as your long-term care plan. Instead, look at the other options discussed in past issues of Retirement Watch and in my books.

The Data

Personal income increased 0.3% in March, matching the rise in February.

Personal spending was unchanged in March after increasing 0.1% in February. Spending on services increased in March while spending on goods declined.

Inflation continues to slowly decrease. The Fed’s preferred inflation measure, the Personal Consumption Expenditure (PCE) Price Index, increased 0.1% in March after jumping 0.3% in February.

Over 12 months, the PCE Price Index increased 4.2%, down from 5.1% at the end of February.

Excluding food and energy, the core PCE Price Index increased 0.3% in March, matching February’s increase.

Over 12 months, the core PCE Price Index was up 4.6% at the end of March, after climbing 4.7% at the end of February.

The ISM Manufacturing Index increased to 47.1 in April from 46.3 in March. The April level still indicates the sector is contracting.

The ISM Services Index for April was 51.9, up from 51.2 in March. This is the fourth consecutive month the index was above 50.0, indicating expansion, after dipping below 50.0 in December.

The PMI Manufacturing Index popped above 50 in April to 50.2 from 49.2 in March.

The PMI Services Index also improved in April, rising to 53.6 from 52.6 in March.

The PMI Composite Index for the economy increased to 53.4 in April from 52.3 in March. That’s the highest level since May 2022.

Factory orders in March increased 0.9% after declining 1.1% in February. Excluding the volatile transportation sector, orders declined 0.7% in March, the same as in February.

The Consumer Sentiment Index from the University of Michigan increased to 63.5 at the end of April from 62 at the end of March.

Assessments of both current conditions and expectations increased.

But expectations of inflation over the next 12 months increased to a five-month high of 4.6%, up a full percentage point from March.

The first estimate of GDP for the first quarter of 2023 projected GDP grew at an annualized 1.1%. That’s down from 2.6% for the fourth quarter of 2022.

Business investment continued to increase, but at a lower rate than in the previous quarter. Residential investment continued to decrease in the first quarter, though at a much lower rate than in the fourth quarter.

Consumer spending increased by 3.7% in the first quarter after increasing only 1.0% in the fourth quarter.

There were 296,000 new private sector jobs created in April, according to the ADP Employment Report. That’s an increase from 142,000 estimated for March.

The April level is the highest since July 2022. The report also found that employers were able to hire workers while offering lower pay increases than in the recent past.

Job openings declined by 384,000 in March to 9.6% million, according to the Job Openings and Labor Turnover Survey (JOLTS) report. That’s the lowest number of job openings since April 2021. Openings reached a record high of 12 million in March 2022.

Layoffs increased to 1.8 million in March from 1.6 million in February.

There were only modest changes in hires, separations and the number of people quitting jobs.

New unemployment claims decreased by 16,000 to 230,000 in the latest week. That was the first decrease in three weeks.

Continuing claims, which lag a week behind new claims, decreased to 1.858 million from 1.861 million.

The Markets

The S&P 500 rose 1.17% for the week ended with Tuesday’s close. The Dow Jones Industrial Average gained 0.46%. The Russell 2000 lost 0.79%. The All-Country World Index (excluding U.S. stocks) added 0.27%. Emerging market equities advanced 1.13%.

Long-term treasuries lost 0.92% for the week. Investment-grade bonds fell 0.45%. Treasury Inflation-Protected Securities (TIPS) declined 0.64%. High-yield bonds decreased 0.18%.

On the currency front, the U.S. dollar rose 0.11%.

Energy-based commodities fell 4.25%. Broader-based commodities lost 2.42%. Gold gained 0.95%.

Bob’s News & Updates

My latest book is “Retirement Watch: The Essential Guide to Retiring in the 2020s.” Learn more and order by clicking here and here. You can be among the first to write a review.

My previous book, “Where’s My Money: Secrets to Getting the Most out of Your Social Security,” is receiving mostly five-star reviews on Amazon for telling you clearly what your benefit options are in different situations and how to determine the best choice for you. You can find it on Amazon.com or Regnery.com.

The number of regular viewers for my Retirement Watch Spotlight Series continues to increase. You should sign up because I make in-depth presentations of key retirement finance topics. You can watch these online seminars from the comfort of your home or office at times you choose. To learn more about my new Spotlight Series, click here.

A recent five-star review of my book, “The New Rules of Retirement” on Amazon.com said, “A complete retirement guide! One of the best books on this topic!” Click for more details about the revised edition of “The New Rules of Retirement.”

If you’re interested in my books, check my Amazon.com author’s page.

I’m a senior contributor to the Forbes.com blog. You can view my contributor page here.

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